- The deal could alter lubricants supply in Europe by incentivizing longer use and using base stocks from countries with a lower carbon footprint.
- The shift from Group I and II base oils could accelerate and also may lower overall demand. It may boost imports of Group III and IV base stocks.
- Lubricant producers can embrace the deal by developing products with lower carbon footprints but also ones that increase the sustainability of the machinery they fill.
Change is coming for the global lubricants industry. New European Union legislation, dubbed the Green Deal, hoists sustainable energy to the top of the bloc’s agenda and will reverberate far beyond the bloc as importers overhaul products to comply with the world’s largest import market.
The suite of reforms that will help the Eurozone get to net-zero emissions by 2050 – in other words, some emissions will still be allowed but offset with carbon-removal mechanisms – include encouraging technological innovation, more recycling and enhanced energy efficiency. There were as of early 2020 at least 40 separate legislative and regulatory reforms involved. Some have already been approved, such as a sustainable-chemicals strategy published in October 2020, whilst others are still being developed.
The Green Deal’s biggest and most direct impact on the lubricants industry will likely come from tax policy, by adding clarity and consistency. It mandates an updating of the existing Energy Tax Directive (EDT), likely in the second quarter of 2021. EU directives require member states to update their laws in a specific area, typically to harmonize laws and regulations across the bloc. This one sets rules for taxing energy, including through minimum and maximum rates for specific products. It was last updated in 2015 and set a minimum rate of zero for lubricants, the rationale being they are not depleted as quickly as fuels and produce fewer emissions.
EU member states could not agree on a maximum rate, and this has led to market distortions. Those include importers who avoid taxes by bringing lubricants into countries with a lower rate and then reexporting them to those with higher rates; intentionally mislabeled products; and carousel fraud, in which value-added taxes are purposefully misapplied.
An updated ETD should be good news for the lubricants industry, said David Wright, director general of the United Kingdom Lubricants Association. It is expected that the EU will retain lubricants in the ETD but at a zero rate. This will reduce opportunities for market distortion, said Wright.
Aims of the Green Deal
- Net zero greenhouse gas emissions by 2050
- Build a ‘circular’ economy that uses fewer resources and recycles and reuses more
- Develop climate-neutral transport systems
- Reduce negative environmental impact of agriculture
- Double or triple the rate of building renovation
- Eliminate toxins emitted during production
- Reverse biodiversity loss
Effects on Trade
The Green Deal could also change trade policy, if a new tariff called the Carbon Border Adjustment (CBA) Mechanism is approved, also likely in the second quarter of 2021. This tariff would apply to imported lubricants, base oils, additives and other primary or intermediate inputs that come from countries that do not have a mechanism to make emitters pay for their emissions, such as a carbon tax or a system to buy, sell and trade emissions permits, such as the EU’s Emissions Trading System (ETS). About 25% of overall Eurozone emissions come from imported petroleum products.
The tariff would help to decarbonize the European transportation sector 2050 by making lubricants, base stocks and additives with a smaller carbon footprint less expensive for European lubricant producers in comparison with those products with a bigger footprint. In one of many potential examples, imported base oils could be chosen on the basis of the emissions created in producing and refining the crude oil from which they were created. That could mean European producers importing more Saudi Arabian crude than Russian crude, because the latter requires more energy to extract. Exporters to the EU across all petroleum products could see their profitability fall by about 20% if crude prices range from $30 to $40 per barrel, or by about 10% at $60 per barrel, according to research from Boston Consulting Group. The Green Deal’s effort to decarbonized transportation could also accelerate the shift to electric powertrains in commercial vehicles and for public transit, which could impact heavy-duty lube demand in two ways – by lowering overall demand, but also by emphasizing higher-performance products.
For European lubricant producers, the tariff would help them compete against imports from countries that do not levy a price on carbon emissions. Many of those producers like that basic idea, according to the EU’s mechanism for seeking feedback before policies are adopted, but are concerned about implementation if the EU decides to exempt some countries. Exemptions could be applied to products from developing countries, for example, or from those designated by EU legislation and trade rules.
“The CBA must apply to products from a given country regardless of the preferential status,” according to official feedback on the proposal submitted to the EU by AEGIS Europe, an umbrella group of continental manufacturing associations. The EU could distort markets by exempting countries because producers in them could have a competitive advantage.
Whilst tax and trade policy remain important ramifications for the specific processes and supply chains inherent to supply lubricants to European buyers, the EU Green Deal also brings change for lubricants in the form of an opportunity to prove its ability to help create the sustainable economy envisioned. Lubricants producers can work to reduce the greenhouse-gas emissions from their own production processes, such as by making them from renewable or recycled feedstocks. Impact may come from the wider role lubricants producers fill in the global energy, industry and transportation sectors, UKLA’s Wright said. They could help decarbonize these activities by developing longer-lasting lubricants, lubricants that extend the life and enhance the efficiency of vehicles, by making them from renewable or re-refined feedstocks and by exploring developing alternatives that help lower emissions. The EU anticipates a combination of public and private capital required of at least €1 trillion.
Rerefining used lubricants is one option, and as of 2018 EU industry generates 950,000 tonnes of waste oil annually, recovered from vehicle engines and industrial process and suitable to be converted to base oils. There are currently four technologies for doing so, and result in greater emissions savings than refining them into fuels6. Base oils can also be created from renewable feedstocks, and may yield lubricants with higher performance. In August, Chevron and Novvi LLC, a California-based producer of base oils from renewable stocks, announced the first production from a facility in Houston, Texas. These are intended to perform more like polyalphaolefins than Group II or Group III base oils. Chevron in 2016 announced an equity investment in Novvi.
Innovation is not limited to the products themselves, but also to how they are distributed and owned. One option could be for producers to lease lubricants to users instead of selling them, UKLA’s Wright said. In this arrangement, a producer would recover used lubricants no longer useful for rehabilitation or recycling. Chemical leasing could also reduce producers from the need to increase sales volume in order to increase profits – instead, they could sell lubrication as a service rather than selling lubricants as a product. That could create the incentive to boost efficiency and earn the same profits from less lubricant.
“The technical challenge is in the formulation of products to be demonstrably more sustainable,” Wright said. “The use of lubricants is already becoming more efficient across different markets. We’ve got to reposition ourselves as a part of the solution and not a part of the problem.”
Even with this raft of regulations coming over the horizon, there is a view in the industry that corporate sustainability is driven by investors and ESG ratings rather than regulation. ESG investors don’t consider regulations as much of a driver and that framing sustainability conversations around them lacks credibility. In publicly traded companies, it leaves the question in the air of how and why small business should react.